Apple’s New Phone Drives a Wedge Between Korea and Taiwan

Apple’s hotly anticipated iPhone 6 could be helping to break up one of Asia’s most dependable economic relationships.

Factory output from South Korea and Taiwan long has moved almost in lockstep as both helped meet global technology demand. But Apple is trying to reduce its reliance for parts on smartphone rival Samsung Electronics, and the iPhone 6 could pull Taiwan more firmly into a production orbit independent of Korea’s.

Taiwan’s industrial production index rose 5.2% on-year in May, beating economists’ forecasts, after rising 5.29% in April and 3.2% in March. Korea won’t report May industrial production until Friday, but its April production slowed to 2.4% on-year, from 2.6% in March.

Investors long have regarded Taiwan and South Korea as roughly interchangeable proxies for global trade growth, particularly for global electronics demand. Both followed in Japan’s footsteps in becoming contract manufacturers for big-name companies. And while Korea’s Samsung and LG Electronics eventually succeeded in becoming brand names of their own, both countries’ factories churned out a lot of the same stuff – computer chips, personal computers, flat-panel screens and, most recently, smartphones.

It didn’t matter so much that Korea was the base for Samsung and Taiwan for Hon Hai, owner of Foxconn International, the company that assembles the iPhone. While Samsung makes its own smartphone, the Galaxy, it also supplied up to 25% of the iPhone’s parts by value.

As a result, between the time Apple launched its first iPhone in mid-2007 and Samsung unveiled its first Galaxy two years later, the 12-month correlation between Taiwan’s industrial production growth and South Korea’s climbed from 0.36 to a record high of 0.98 (with zero signifying no correlation and 1.00 representing a perfect correlation), according to data from Thomson Reuters. The correlation then drifted lower but still has averaged 0.84 since, compared to an average correlation of 0.62 before the Galaxy debuted.

In other words, smartphones had become the engine of industrial output in both countries.

But Apple’s rivalry with Samsung may now be straining that linkage. Apple has long accused Samsung, its contractor, of copying its designs for use by Samsung the smartphone maker, giving rise to a long-running legal battle.

As a result, Apple has been trying to wean itself from Samsung. It buys its flash-memory chips from Toshiba, according to IHS. Apple won’t say where it buys its touch-screens – the most expensive part of the iPhone, at $41 each – but analysts believe they come from Japan Display, LG Display, Sharp and possibly Toshiba.

But Apple still had to rely on Samsung to provide the iPhone’s microprocessor, the brains of the device.

Last year, Apple signed a deal with Taiwan Semiconductor Manufacturing Co., or TSMC, to start providing it with microprocessors for iPhones and iPads this year. The iPhone will likely be powered by TSMC’s A8 chip when it’s launched later this year.

TSMC has said supplying the chip should help it to record net profits this year. In May, Taiwan’s industrial production was led by a 10.3% rise in electronic parts and components.

That has helped push Taiwan’s benchmark stock index up 7.4% this year, to its highest level since late 2007, compared to a 2.9% gain for Korea’s benchmark. TSMC’s stock has climbed 17% this year, while Samsung’s has fallen 2%.